Software Consulting Billing Models

by Lucid Information Technologies
Like with most professional services, software consulting may be offered a la carte
or all-in-one. There can be advantages or disadvantages to each model, however,
so it is important to understand which models your vendor offers in the early stages
of the relationship. Most firms will offer an hourly rate, although this
is not always the best value for the client on every consulting engagement. Hourly
rates can be subject to cost overruns - especially without dedicated Software Project
Management. View our page on what attributes to look for in a good software consultant .

Estimates

There are several important things to consider regarding estimates.

Free Estimates

While free estimates on smaller software projects are common, beware of free estimates
on larger project scopes. Good estimates require work - usually even requiring multiple
disciplines (architecture, implementation, integration, project management, documentation,
release management). They are also highly valuable in terms of reducing project
delivery risk as well as budget risk. For this reason, they should come at a price
and take some time. Expect this from a good software consulting firm.

Paid Estimates

Paid estimates often come in the form of a "scoping exercise" or "scoping
project". This project may be offered on the same price basis (e.g. hourly)
as the resulting project, or possibly even a different one. It is common practice
for attractive clients to underbid the scoping project so that there is an easier
"yes" decision on behalf of the buyer. These scoping exercises can also
be a great way to "get to know" your potential custom software vendor.
However, be sure that there are clearly identified deliverables at the end of this
phase. Unscrupulous vendors may "keep" the scope document if you do not
approve the resulting project, so that you cannot use their scope to bid the project
out.

Estimate Accuracy

As a customer, you should know that hourly projects will tend to run over the estimated
budget more often than under. The larger and more experienced the software consulting
firm, however, the better the estimation techniques and less likely to see budget
overruns for a given scope of work.

Caps

A Cap is an upper limit (sometimeA Cap is an upper limit (sometimes called a "not to exceed" or NTE) of
pre-approved hourly spending on behalf of the customer. Especially with newly
formed software consulting relationships, putting a "cap" in place is a good
idea until you as a customer become comfortable with the time efficiency of the
firm and have a good feeling of value for money of the software consultants'
time. For example, you might approve $150/hr for a given scope, "not to exceed"
$18,000.

Fixed-Fee

Fixed-Fee fee projects offer a fixed scope of work to be delivered for a predetermined
fee. While it may seem that a fixed fee would be the best option from a customer
perspective, it is important to know that an experienced consulting firm will build
in a premium over their actual estimated work to account for unforeseen challenges,
extra meetings, and various other risks. This means that you will be paying a risk
premium for the software consulting firm to shoulder all of the financial project
risk.

Up Front Payments

Often, fixed-fee projects will require some amount of up-front payment. This serves several
purposes for the consulting firm:

Engage the client - Once money has changed hands, all parties are engaged and should
be actively pursuing results. This helps prevent a casual client from shirking client
responsibilities.

Finance the project - The consulting firm is paying its employees to begin work
on your project, and an up-front payment helps offset the ongoing cost of development.

Finance the project - The consulting firm is paying its employees to begin work
on your project, and an up-front payment helps offset the ongoing cost of development.

Demonstrate client's ability to pay - While a contract represents a willingness
to pay, a check shows the ability. This can also serve to measure the timeliness
of the client's AP department.

Milestones With larger Fixed Fee projects, Milestones are a common practice. In
the Milestone model, a larger project scope is broken down into several smaller
sets of deliverables.

Some example deliverables might include:

Develop and Deliver Scope Document

Design and Document System Architecture

Deliver Database Schema

Implement Database Structure

Deliver Proof of Concept

Implement Database Structure

Implement Initial set of Features

Deliver a final product

Perform software training

Milestones are generally a good idea for both consultant and customer, as they provide
for more predictable delivery, as well as enforcement for the proposed project timeline.

Block/Retainer

Block Hours and Retainers are two forms of pre-paid services and are the least common
among all the Billing Models in software consulting. The Block Hour model involves
pre-purchasing a set quantity of hours, which are then available to the user in
an on-demand model. Block Hours are most commonly found when a software consulting
firm does not offer a differentiated rate structure (that is, all services are offered
at one rate, rather than an individual rate for each service). For example, you
may pre-purchase 200 hours of work @ $100/hr for a total fee of $20,000. Retainers
are similar to Block Hours, but are a pre-purchased dollar amount of work. They
are commonly offered when a variety of hourly rates are present, say, for various
different skillsets (project management vs. development) or various different levels
of seniority (senior software consultant vs. junior software consultant). For example,
you may purchase $25,000 of work, equating to 217 hours of a $115/hr Senior Software
Consultant or 294 hours of a $85/hr Junior Software Consultant.

Maintenance

Maintenance Agreements are akin to Warranties. In a Maintenance Agreement, a software
consulting company will offer a set of guaranteed services in exchange for a fixed
periodic payment. For example, Computer Programmers Inc. might promise to fix all
bugs related to your custom accounting software for $12,000 per quarter. More often
than not, Software Maintenance Agreements offer:

Service Level Agreement - guarantees on turnaround time, on/off site support, quantities
of hours, phone support

Fixed Price

Periodic Payment

Defined Scope of Services - typically will not include any "new" software
development